Why 'Risk' Is An Unloved Word in Philanthropy

August 02, 2012

(Derrick Feldmann is the CEO of Achieve, an Indianapolis-based consulting firm that works with nonprofits. In his previous post, he cautioned organizations to think twice about flying the "innovation" flag.)

"There are risks and costs to a program of action, but they are far less than the long-range risks and costs of comfortable inaction."

-- John F. Kennedy

Whenever I visit my financial advisor, he almost always gets around to talking about risk. The subject usually comes up when I ask him how I can increase the value of my portfolio. His response is almost always the same. "What's your tolerance for losing money?" He always has ideas for new investments, but he's quick to point out that many aren't "sure bets." Anyone seeking bigger investment returns in this environment -- and lucky enough to have discretionary resources to invest in the first place -- has played this game at one point or another.

So why are risky investments something most of us are willing to tolerate in our personal financial lives, but something we avoid like the plague in our philanthropic work?

The answer is simple: We're afraid to make risky philanthropic investments because we don't want to "lose" money.

As funders and donors, we've grown accustomed to making investments in organizations we know will succeed. They have a history, proven track records, and staff and leadership that can execute. Pressure from boards and other stakeholders who view philanthropic investments only through the lens of success contributes to this predictability. Typically, these stakeholders are most concerned about protecting the corpus and in signing off on decisions that won't get them into trouble. This isn't all bad. It ensures, among other things, that people in need will be helped, especially during times when they need it most. But as an investment approach, it does little to encourage innovation.

Think about your own work for a minute and ask yourself the following questions:

What is the riskiest grant we ever made?

What was our motivation for making that grant?

How many times have we given a grant to an organization that didn't have a track record of success?

How much money are we willing to set aside to fund riskier initiatives?

If you're like a lot of program officers, it may not be easy to think of a grant you made that could be classified as "risky." But you need look no further than your own personal giving for examples of risky philanthropic investments. Indeed, we make these kinds of investments every time we support a friend, colleague, or family member in a run/walk/race for a medical cause or cure. As a country, we invest more than $20 billion a year to find cures for diseases such as cancer, Alzheimer's, and stroke. And those investments are "risky" because there's very little measurable return on our donations short of a cure or significant new discovery. But we choose to fund this type of research anyway, knowing that most failures in the lab bring us closer to the ultimate goal.

Unfortunately, many problems today -- whether social, environmental, or economic -- are every bit as large and complicated as finding the cure for cancer. And the only way we're going to solve them is to take our approach to medical research and apply it to other areas. In other words, we need funders and individual donors who are truly willing to embrace risk and invest significant dollars in potential solutions that may not yield immediate results but get us closer to our ultimate objective, even if it's only by demonstrating what doesn't work.

Here are four things I believe philanthropy can and should do in order to embrace more risk.

Emulate the founders. On the road to building great fortunes, the founders of some of the biggest foundations in the country took risk almost every day of their professional and business lives. Whether they played a leading role in forging the modern steel or oil industry, made it easy for people to use a computer or reap the benefits of globalized supply chains, or created online social networks that connected the world, our greatest entrepreneurs and philanthropists were great risk-takers who never lost sight of their objective: To deliver the most value to the greatest number of consumers. That's precisely the kind of entrepreneurial spirit we need today as we look to provide and fund solutions to the most intractable problems affecting our communities.

Set aside funds for riskier ventures. If foundations were for-profit companies and had to compete in the marketplace, they almost certainly would rush to set up research and development arms with a mandate to innovate, develop new programs and initiatives, and evaluate how existing programs and initiatives were performing. But as endowed tax-exempt entities, foundations rarely have to compete and so have little incentive to set aside funds to invest in anything other than proven organizations and concepts. Now, I get that foundations and donors can't fund every risky investment and innovation that comes along. But I'm convinced that they can and should begin to pool and earmark funds for investments in organizations and concepts that don't have a track record of success but do have potential to bring about dramatic change in our communities.

Ask new questions. Donors and foundations need to start asking new questions when a risky investment presents itself. Instead of the historical "proven impact" questions typically posed during the proposal and due-diligence stages, funders should focus on questions designed to help them understand the level of risk involved in the proposed idea or solution. Questions like:

Why is this a risky concept/approach?

Why is your approach to the problem better than existing approaches?

What's the worst that could happen if you fail?

Even if you fail, what do you hope to learn from the approach you're proposing?

Who are the experts/mentors you look to for guidance in your work and what do they have to say about the approach/concept?

If the approach/concept demonstrates success, how do you plan to sustain it?

Foster new learning environments. As a funder, you have a tremendous opportunity to be transparent about grants and programs that worked -- as well as those that didn't. Here's your chance to create a learning opportunity -- indeed, a learning community -- for social entrepreneurs and innovators. Share your knowledge about the grants you made, the internal reports that tracked the progress of those grants, and why the investments you made did, or did not, succeed. Take it a step further and create a forum on your Web site where grantees can come together and learn from each other about what worked and didn't. At a minimum, it will help them think about new approaches to their existing work and perhaps lead to new ideas that you may want to support in the future.

There you have it. Let's create a philanthropic marketplace where risk is celebrated, not avoided, and serves to bring us closer to solving some of the biggest challenges we face. History invariably shows that if we give good ideas a platform and a chance to succeed, they will. The sooner we get over our aversion to risk and instead support those individuals and organizations willing to think outside the box, the sooner we'll prove history right.

Comments

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Excellent article, but read this one. Joe Brewer a Seattle based consultant and strategist writes eloquently about the mindset behind the no risk-taking approach and how we need a revolution of consciousness on the progressive side. Its really a matter of language. The notion of wealth as well-being may be a better route for us progressives to take to arrive at a more abundance mindset to achieve our ambitious social goals. Being honest, we are just uncomfortable talking about human needs and wealth in the same sentence. In truth, we have to have a "revolution from within" first before we can save the world. Here is the link: http://www.cognitivepolicyworks.com/blog/2009/02/23/beyond-scarcity-reinventing-wealth-in-a-progressive-world/